CREDIT MARKETS

CREDIT MARKETS; Coup's End Lifts Short-Term Rates

By KENNETH N. GILPIN

Published: August 22, 1991

The abrupt end to the Soviet coup yesterday pushed short-term interest rates back up as quickly as they had fallen earlier in the week. Treasury bond prices also rose on the news.

The steep climb in short-term rates left traders scrambling to get out of positions established earlier in the week, when the Soviet crisis made it seem clear that foreign capital, particularly from Europe, would pour into safe dollar-denominated assets, and that short-term interest rates would therefore continue to fall.

"It's been a bad day on the Street," one Government securities trader said. "Since Monday, the approach has been to buy the short end of the yield curve, because everybody was convinced that if the Soviet Union totally broke down it would make Germany such a basket case that capital was going to flow like water into bills and short-term notes. People have gotten hurt."

Given the speed with which events unfolded yesterday, and the fact that dealers were unable to fully hedge short-term positions in the futures market until the opening of the Chicago Board of Trade, "most of the people with London offices" probably got clobbered, said James R. Capra, a principal at Moore Capital Management, a New York money management firm. Yield Curve's Blip

The rise in short-term interest rates left the yield curve, the difference between rates on two-year notes and 30-year bonds, in almost exactly the same shape it was late Friday.

"When we look back at this blip in the yield curve in a couple of years, we are going to scratch our heads and try to remember what caused it," said Joseph Liro, a senior vice president and money market economist at S. G. Warburg & Company.

The apparent end of the Soviet coup allowed credit market participants to refocus on the Federal Reserve Board. The Fed, which is widely expected to lower key short-term interest rates soon, gave market participants no such signal yesterday.

"As of right now, things are on hold," Mr. Liro said. "We'll just have to wait and see how long it stays that way."

Brian J. Fabbri, chief economist at Midland Montagu Economics, said the quick end to the Soviet crisis left the "present predicament for the U.S. economy pretty much unchanged."

"Therefore," he said, "the presumed bias toward easier monetary policy remains. Now that equity markets around the world have recovered and are rallying, there is still the need for the Fed to ease, and probably more than once." Bonds Climb

In the secondary market for Treasury securities, the 8 1/8 percent 30-year bonds of 2021 were offered late yesterday at a price of 100 3/4, up 10/32, to yield 8.05 percent, down from 8.08 percent late Tuesday.

Mr. Capra, Mr. Fabbri and others said bond traders may view the apparent end of the Soviet crisis as reducing the risk of holding long-term securities.

Among Treasury note issues, the 7 7/8 percent 10-year notes were offered at a price of 100 21/32, up 3/32, to yield 7.77 percent. But the 6 7/8 percent two-year notes fell by 6/32, to a price of 101 6/32, to yield 6.21 percent.

"A drop of that size in the price of a two-year note is the equivalent of a full point decline in bond prices," Mr. Capra said.

Late yesterday the Treasury announced it will sell $12.5 billion worth of two-year notes on Tuesday, and $9.25 billion worth of five-year notes on Wednesday.

In when-issued trading after the announcement, the two-year notes were offered at a price to yield 6.26 percent. The five-year notes were offered on a when-issued basis at a price to yield 7.26 percent.

Short-term Treasury bill rates moved sharply higher. By late in the day, three-month bills were offered at a discount rate of 5.27 percent, up 17 basis points, or 17 one-hundredths of a percentage point. Six-month bill rates rose 13 basis points, to 5.26 percent. And one-year bill rates rose 12 basis points, to a late offered rate of 5.27 percent.

Elsewhere, the State of California for the first time yesterday issued taxable securities. It offered $602 million worth of taxable general obligation bonds at competitive bid.

A bid from a group led by Goldman, Sachs & Company and Salomon Brothers won the issue, which consists of serial bonds maturing from 1992 to 2001.

Coupons on the securities range from 7.70 percent on bonds maturing in 1992 to 8.15 percent on bonds that mature in 2001.

The securities, which are noncallable for life, are rated AAA by both Moody's Investors Service and by Standard & Poor's.

In the secondary market for investment-grade corporate bonds, traders said that prices of most issues rose by 1/8 of a point in fairly active trading.